The Motley Fool

2 more FTSE 100 dividend stocks I’d buy and hold forever

I highlighted the dip-buy opportunity at two top-quality FTSE 100 companies in an article yesterday. Today, I have two more blue-chip businesses that are similarly trading at discount prices.

Intertek (LSE: ITRK), at 5,544p, is 7% below its high of 5,962p, while Diageo (LSE: DGE), at 3,152p, is down 13% from a high of 3,625p. I’d be happy to buy into both these businesses at their current discounts.

Structural growth drivers

Intertek is a leading quality assurance provider. Its network of over 1,000 state-of-the-art laboratories in over 100 countries provides customers with testing, inspection and certification services. The industry has attractive structural growth prospects due to a number of reasons, including expanding regulations, increasing focus of corporations on risk management, and rising consumer demand for higher quality and more sustainable products.

In what is a fragmented industry, Intertek’s scale enables it to meet the needs of multinational companies across multiple industries and geographies. This gives it a competitive advantage over smaller players that lack the capabilities to operate on such a scale.

Consolidating competitive advantage

The company appears to be consolidating its competitive advantage, because its operating profit margins are steadily rising (from 13% to 16% over the last five years) and its return on capital employed (ROCE) is running at a very strong level of over 20%. Meanwhile, shareholders have enjoyed an annualised total return (capital gains plus dividends) of more than 19% over the last five years, compared with less than 6% for the FTSE 100.

In a Q3 trading update today, Intertek reaffirmed its full-year outlook, including a further increase in its profit margin. City analysts expect the company to deliver a 6% increase in earnings per share (EPS) to 212.2p, from last year’s 200.7p, and a 7% increase in the dividend to 106.5p, from 99.1p.

I think a price-to-earnings (P/E) ratio of 26.1 and dividend yield of 1.9% are reasonable for this increasingly profitable blue-chip business, with excellent structural drivers for growth. As such, I’d expect it to continue delivering market-beating returns for shareholders.

Second to none

Diageo owns over 200 outstanding drinks brands, sold in 180 countries. Its brands include internationally renowned names (from Johnnie Walker whisky to Guinness stout) and local favourites (from Turkey’s Yeni Raki to leading Brazilian premium cachaça brand Ypióca). With brands at almost every price point and in every category, the breadth of Diageo’s portfolio is second to none.

The scale of the group and the strength of its brands provide competitive advantages. These are reflected in its operating profit margin, which has averaged an outstanding 29% over the last five years, and ROCE, which has averaged a very decent 17%. Meanwhile, a five-year annualised total return of over 12% for shareholders is more than double the return of the FTSE 100.

Another excellent opportunity

Diageo expects to maintain annual organic mid-single-digit net sales growth, and to grow organic operating profit ahead of net sales in the range of 5%-7%. For its financial year ending June 2020, City analysts expect a 7% increase in EPS to 140.4p from last year’s 130.8p, and a 6% dividend increase to 72.5p from 68.6p. At the current share price, the P/E is 22.5 and the dividend yield is 2.3%.

Again, I see this valuation as attractive for one of the FTSE 100’s premier businesses, and an excellent dip-buy opportunity for investors.

You Really Could Make A Million

Of course, picking the right shares and the strategy to be successful in the stock market isn't easy. But you can get ahead of the herd by reading the Motley Fool's FREE guide, “10 Steps To Making A Million In The Market”.

The Motley Fool's experts show how a seven-figure-sum stock portfolio is within the reach of many ordinary investors in this straightforward step-by-step guide.

Simply click here for your free copy.

G A Chester has no position in any of the shares mentioned. The Motley Fool UK has recommended Diageo and Intertek. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.